Net earnings from continuing operations were $794 million, or 80 cents per share, on revenues of $11.7 billion. That compares with earnings of $882 million, or 85 cents per share, on revenues of $10.2 billion in the same period in 1999.
Analysts expected HP to earn 78 cents per share, according to a survey by First Call.
At 1 p.m. PST, the close of regular trading, HP shares were up $3.31 to $128.06. The earnings report was issued after the close. In after-hours trading, HP stock rose to an all-time high of $131.
HP chief executive Carly Fiorina said in a conference call that sales of low-end L-class and high-end V-class Unix servers are getting stronger and that a new, more powerful mid-range N-class will be announced later this month.
"We've begun to turn things around in the server market," Fiorina said. HP sold V-class servers to Gillette, Procter & Gamble and DaimlerChrysler, she said.
HP, along with IBM and Compaq, has had trouble selling against Sun Microsystems' Unix servers, analysts have said. Such computers have been in great demand because of the growth of Internet computing.
In addition, changes to HP's North American sales force are taking effect, Fiorina said. HP has completed a "winnowing" of sub-par salespeople, given the rest more authority to close deals faster, and brought in new management.
In addition, HP's revenues were strong from selling highly profitable printer "consumables" such as toner cartridges and inkjet paper, the company said, and the use of the Internet and digital photography are making it stronger. Analysts expected printer revenue to buoy earnings.
Printing a page off the Internet uses two to three times as much ink as printing a page from the more traditional tasks such as printing word processing documents, and digital photos use 10 times as much ink, HP executives said. HP's earnings from its various business segments were mostly down from last year's quarter.
Earnings from operations from the company's printing and imaging systems grew by 5 percent to $677 million from $643 million, but earnings from IT Services and Computing Systems fell 19 percent and 27 percent, respectively, to a combined $360 million, down from $470 million. Revenue for all three segments, however, increased from quarter to quarter.
HP suffered from an increasing cost of sales, a measurement that has a strong bearing on how profitable products are. HP's cost of goods sold increased to 71.5 percent of net revenue this quarter, compared with 69.1 percent in last year's similar quarter and 71.3 percent in the fourth quarter of 1999.
The increasing cost of sales was the result of aggressive PC pricing and increasing memory costs, chief financial officer Bob Wayman said in a conference call. "With home PCs, we were able to adjust prices quickly, but (that was) not the case in commercial PCs and some of our server lines," Wayman said.